What counts is the marginal tax rate, not the average. So the right rate to look at is 25%, not 20%.
You lost me here. Let me explain my logic, to see if I'm confused or if we're talking past one another. I really do want to make sure I understand how this math works.
Let's say I have an extra 25k left to invest at the end of the year. If I were to somehow tax shelter this 25k, our taxable income would be $105,000 - $17,500 - $25,000 = $62,500. Now, if this were not tax sheltered the first $11,300 would be taxed at 15% (since that is how much is left in the 15% bracket) and the remaining $13,700 would be taxed at 25%. As a whole, this $25,000 is taxed at (11,300 * .15 + 13,700 * .25) / 25,000 = 20.48%.
Any state or local income taxes you would avoid by contributing to a 403B?
I am not sure how to determine this.
In a 25% bracket I would personally choose to do a traditional IRA/403B/401k rather than Roth. I will be semi retiring next year and I can already see that our all-in tax rate will be laughingly low, so taking the deductions along the way was a good bet. I can convert to Roth any time I like, and I can get money out before 59.5 years of age via the roth conversion pipeline or doing an SEPP/72T plan.
That said I think a blend of savings is most helpful of all. I would contribute enough to traditional retirement plans until you have sheltered everything that would be taxed at 25% and then I would save the rest in a taxable account for maximum flexibility. Roth if you really must, but I would suggest that at your marginal tax bracket and above, Roth is really most useful as a conversion vehicle.
I believe our plan now is going to be using Traditional IRA's instead of Roth IRA's. When I originally decided to use a Roth, I decided it because taxes are at a historic low and would most likely be higher when I retire. However, now I'm seeing that my spending in retirement will be much lower than my income is today and that this previous decision was incorrect.
If we use traditional IRA's, we'll have 105,000 - 17,500 - 11,000 - 2,000 = 74,500 in taxable income, which puts 99% of our income in the 15% bracket.
So, our new plan is the same as the old one with the following exceptions:
1) At the start of the year $9,000 will go to a personal investment account
2) We'll begin using Traditional IRAs instead of Roth IRAs to be more tax efficient.
Thanks brewer12345 for the nudge in the right directions!